G.R. No. L-39805 May 29, 1987
IFC-SERVICE LEASING & ACCEPTANCE CORPORATION, plaintiff-appellee, vs. SARMIENTO DISTRIBUTORS CORPORATION AND SARMIENTO SECURITIES CORPORATION, defendants-appellants.

FACTS

IFC-Service Leasing and Sarmiento Distributors Corporation, with Sarmiento Securities as surety, entered into a 36-month Equipment Lease Agreement for eight radio-telephone units commencing September 1971. The defendants defaulted on rental payments, with arrears reaching P19,583.16 by November 1972. Prior to this, in August 1972, Sarmiento Distributors informed the plaintiff of its decision to surrender the equipment due to a change in business strategy, later reiterating this offer in September 1972. The plaintiff inspected the units and found them deteriorated beyond ordinary wear and tear.
The defendants contended that their obligation was extinguished by the supervening issuance of Letter of Instructions (LOI) No. 1 on September 22, 1972, by President Ferdinand Marcos, which ordered the takeover and control of all privately-owned media of communication, including radio facilities, for the duration of the national emergency. They argued this rendered the use of the leased equipment illegal and the contract’s object unlawful, excusing them from paying rentals after that date. The trial court ruled in favor of the plaintiff, ordering the defendants to pay all arrears, the remaining rentals for the full contract term as damages, attorney’s fees, and to return the equipment.

ISSUE

Whether the issuance of LOI No. 1, which prohibited the private use of the leased radio-telephone equipment, extinguished the defendants’ obligation to pay rentals under the lease contract.

RULING

Yes. The Supreme Court modified the trial court’s decision, ruling that the contract was terminated by operation of law upon the effectivity of LOI No. 1 on September 22, 1972. The legal logic is grounded in the principle of fortuitous event or force majeure under Article 1174 of the Civil Code, where an obligation is extinguished when its fulfillment is rendered impossible by a cause beyond the debtor’s control and not due to his fault. LOI No. 1 constituted a lawful act of the government (a trespass in law or perturbacion de derecho) in the legitimate exercise of its police power during the national emergency. This act made the continued use and possession of the radio equipment by the private lessee illegal. Consequently, the very object of the lease contract became unlawful, and the obligation to pay rentals ceased from that date forward. The defendants’ prior offer to surrender the equipment in anticipation of martial law was immaterial, as the termination was effected by the subsequent legal prohibition. The defendants were thus liable only for rentals accruing from the contract’s commencement on September 10, 1971, up to September 22, 1972. All awards for rentals beyond that date and for attorney’s fees were deleted.